Q2 2021 Banc of California Inc Earnings Call
And pre tax pre provision income coming in at $23.5 million.
While payoffs continue to represent a significant headwind on.
Our strong loan production helped drive 15% annualized loan growth in the second quarter.
As the California economy Reopens, we are seeing more loan demand and more opportunities to compete for very high quality credits.
And with a differentiated experience that we are able to offer of banc of California. We are successfully winning a high percentage of the relationships. We are pursuing while maintaining discipline in our underwriting and pricing reflected in our loan yields are holding steady at 4.3%.
In the second quarter, we funded 847 million of loans comprised of $533 million of new fundings and $314 million of line of advances, including 227 million of net warehouse line advances.
Excluding PPP and warehouse on fundings for loans was $190 million higher than the first quarter.
And the average rate on new loan production was 15 basis points above the first quarter.
Through some of our strategic relationships. We're also supplementing our own loan production with strategic purchases of high quality single family and multifamily loans that offer attractive risk adjusted yields on the current environment.
In the near term.
These loan purchases are good tool to help us profitably redeploy the liquidity, we have built up through our continued strong deposit inflows.
<unk> offset payoffs and keep us on track to achieve our targeted level of loan growth and profitability.
The success, we're having in generating organic growth is partly a result of our success in attracting new talent to the bank.
Over the past 2 years, we've made significant progress in building banc of California's reputation as an attractive destination for experienced commercial banking talent.
And as we streamline the company and reduced operating expenses, we are consistently reinvested a portion of the cost savings into adding talented colleagues.
Our initial higher supported an accelerator of our shift to a relationship focused commercial bank.
And each quarter, we look to add new talent that is further strengthening our loan production and deposit gathering capabilities and adding expertise that helps us build our franchise.
The new bankers, we are adding.
Also have enabled us to selectively expand and deepen our presence in key markets throughout California, including Los Angeles, San Diego, Central, California, and Northern California.
These are proven bankers with deep relationships in these markets that have been able to quickly build substantial new business pipelines and contribute to our growth in loans and deposits even in markets, where we don't have branches.
This is a result of hiring quality relationship bankers using targeted and efficient marketing and constantly refining our ability to process and execute on behalf of our clients.
As a result, we continue to expand our reputation and brand as the go to bank for the sectors we serve.
In addition to loan growth our.
Our business development efforts continue to generate strong inflows of noninterest bearing and low cost of interest checking deposits from new commercial relationships.
During the second quarter newly opened DDA accounts contributed $129.3 million of low cost deposits, which produced our eighth consecutive quarter of DDA growth.
The deposit engine that we have built continues to produce strong results, particularly from our specialty in business banking unit this quarter.
As a result of our success in adding new commercial deposit relationships.
We continue to see a positive shift in our deposit mix.
With noninterest bearing deposits, increasing 29 percentage of total deposits and a further reduction of our cost of deposits, which declined 5 basis points to average just 23 basis points in the quarter.
This helped to drive an 8 basis point increase in our net interest margin.
The value of the deposit base, we have built should become clearer as we head into a rising interest rate environment.
Our improved deposit mix has increased our asset sensitivity and given the trends we're seeing in business development. We would expect further improvements on our deposit mix that will continue to increase our asset sensitivity in the future.
The organic growth, we are generating continues to drive more operating leverage and an improvement in our efficiency ratio.
As we are effectively managing our expense levels.
Importantly, we are keeping expenses in check while increasing our investments in business development as I discussed earlier as well as technology of the augment and enhance the client experience. Both in terms of the technology platforms that we employ and the products and services that we offer.
Our technology spending has increased over the past few years, but we've been able to fund that increased investment through our expense reductions and improved efficiencies in other areas.
And as we gain scale through organic growth in the Pacific Mercantile acquisition.
We haven't even greater ability to increase our technology investment in the future while still achieving the improvements we're targeting in our efficiency ratio.
In terms of the Pacific Mercantile acquisition.
We continue to anticipate closing the transaction during the third quarter.
The 2 organizations have been working well together.
We've had a very productive few months in terms of integration planning.
Within 30 days of announcing the transaction we have made all of the personnel decisions for the combined organization.
We have made all the necessary decisions regarding branch consolidations that.
We have scheduled the system conversion for the end of the third quarter.
Based on the past few months of integration planning.
We now feel that we have good visibility on cost savings at or above the 40% level compared to our initial 35% projection with almost all of the cost savings expected to be realized by the end of 2021.
Having spent considerable time together over the past few months, we are now even more excited about the opportunities that will be created from bringing our teams together and leveraging our collective strengths.
We've got a good sense for where we have opportunities to expand existing patent risk relationships.
Particularly amongst some of the larger clients, who are performing well and will require a larger credit facilities to support their continued business growth.
And the relationship managers, we will be adding will now have more opportunity to expand our target markets to include larger commercial clients and have more resources and support to assist them in business development, which should lead to higher levels of production.
At the time of the announcement, we were confident that this was going to be a very positive transaction for our franchise in terms of its impact on the size and composition of our balance sheet, our level of profitability, our business development capabilities and our ability to generate organic loan growth in the future.
And as we've worked together to prepare for closing and integration our level of confidence has only increased.
Now I'll hand, it over to Lynn, who will provide more color on our operational performance then I'll have some closing remarks before opening up the line for questions.
Thanks Darren.
Please refer to our Investor day, which can be found on our Investor Relations website are there any of your.
Our second quarter performance.
I'll start by reviewing some of the highlights of our income statement and then we'll move onto our balance sheet trends unless otherwise indicated all prior period comparisons are with the first quarter of 2021.
Net income available to common stockholders for the second quarter was $17.3 million of 34 cents per diluted share. This compares to $7.8 million or 15 cents per diluted share for the first quarter of 2021.
With the redemption of our series B preferred stock. This past March the second quarter benefited from $1.4 million and lower preferred stock dividends.
In addition, we had quite a few items that impacted the comparison of our net income between the second quarter 2021, and the prior quarter.
Second quarter 2021, net income available to common stockholders included $829000 in pre tax gains on investments in alternative energy partnerships 7.
$700000 of pre tax merger related costs and.
And $1.3 million in pretax net recoveries of indemnified professional fee.
In the prior quarter on a pre tax basis, we had $3.6 million and losses on investments in alternative energy partnerships.
$700000 of merger related costs, and 721000 of indemnified professional fees net.
Net of recoveries as well as $3.3 million in series D preferred stock redemption expense.
These items were offset in part by a lower effective tax rate, resulting from $2.1 million in tax benefits on the exercise of all of our previously issued stock appreciation rights there.
There was no similar tax benefit in the current quarter.
When backing out these items in each quarter net of our normalized effective tax rate of 25% to get a better sense of our core operating performance. We had adjusted net income available to common stockholders of $16.3 million or <unk> 32 per diluted share in the second quarter of <unk>.
<unk> 21, compared to $12.9 million or 25 per diluted share in the first quarter of 2021.
The $3.4 million increase is attributed to higher net interest income lower provision for credit losses, and lower preferred stock dividend of.
Set by higher net losses on equity investments.
Total revenue on the second quarter increased $1.7 million compared to the prior quarter as net interest income increased by $1.9 million and noninterest income decreased by $211000.
Net interest income benefited from 1 additional day on the current quarter and the increase reflected average interest earning assets being comparable between periods, while posting a higher yield and a decrease in the cost and volume of interest bearing liabilities all of which contributed to an expanded net interest margin.
The slight decrease in noninterest income stemmed mainly from lower servicing income and other income offset by higher customer service fees.
Our net interest margin was 327% up 8 basis points from the prior quarter due to a 6 basis point decrease in our cost of funds and a 3 basis point increase in our overall, earning asset yield.
Our earning asset yield increased to $3.8 1% due primarily to redeploying some of our excess liquidity into loans and securities combined with a slightly higher yield on securities.
Our average loan yield remained steady at 4.3% during the second quarter due mostly to lower coupon rates from the impact of loans resetting and our current production on.
Offset by higher prepayment fees from refinancing activity higher income related to loans removed from non accrual status and higher PPP fee amortization due to ongoing forgiveness activity when the impact from these items is excluded our average loan yield was down 5 basis points to 4.1 to pursue.
<unk> in the second quarter compared to $4, 1.7% in the first quarter.
The decrease in this average loan yield is due primarily to a higher percentage of lower yielding <unk> loan balances.
We ended the second quarter of the spot rate of 20 basis points for our all in cost of deposits and as of July 20th our spot rate had dropped further to 17 basis points.
Looking ahead, we expect our funding costs to continue to trend lower in the second half of the year, albeit at a slower rate we.
We have a few larger money market accounts on time deposits that should move down our cost of deposits once they reach the end of their agreed terms and.
In the second half of 2021, we have $510 million of these deposits with a weighted average cost of about 163 basis points. We expect this reduction in higher cost balances to boost net interest income and support our margin in the back half of the year.
Our adjusted expenses increased $288000 from the prior quarter due mostly to higher net losses on equity investments of $1.2 million.
Which are included in other expenses offset by lower salaries and employee benefit costs and lower professional fees. Once we exclude our net indemnified professional recoveries in the current quarter.
On professional fees from the last quarter.
The effective tax rate for the second quarter was 25, 6% compared to 13, 8% for the first quarter due to a tax benefit resulting from the exercise of all of our previously issued stock appreciation rates from the first quarter.
Going forward, we would expect our effective tax rate to be on the 25% to 27% range from the second half of 2021.
Turning to our balance sheet, our total assets increased by $94 million from the second quarter to $8 billion.
We redeployed a portion of our excess liquidity into high quality commercial loans and securities, which brought our cash and cash equivalents down by approximately $216 million from the end of the prior quarter.
We also continued to replay of high cost time deposits with core deposits.
As we selectively add high quality, earning assets in the future. Both in terms of loans and investment securities. We continue to have flexibility to add overnight and other wholesale funding if needed to strategically support our growth in earning assets are.
Gross loans held for investment increased by $221 million or 3.8% during the second quarter as growth in warehouse multifamily CRE and <unk> portfolios more than offset lower CNI SBA and construction loan balance of the.
The $85 million decrease in SBA loans in the quarter was due primarily to the PPP forgiveness process.
As of June 30, we had $194 million of PPP loans remaining consisting of $65 million from round, 1 and $128 million from round 2.
The $35 million increase in the <unk> portfolio stemmed from loan purchases given that we are no longer originating this asset class in house.
The loan purchases more than offset pass on this portfolio and enabled us to utilize some of our excess liquidity to add high quality loans with low ltvs and attractive risk adjusted yields.
Deposits increased $65 million during the second quarter, and our mix and average cost continued to improve thanks to our success in adding new commercial deposit relationships.
Noninterest bearing deposits increased to 29% of our total deposits at quarter end up from 27, 7% at the end of last quarter.
Demand deposits noninterest bearing plus low cost interest checking increased by 6% from the prior quarter, representing our eighth consecutive quarter of demand deposit growth. A goal we remain very focused on to drive franchise value of.
Over the past year demand deposits increased to 65% of total deposits up from 54%.
Collecting a significant improvement we have made on our deposit base.
This increase combined with the lower rate environment, and our proactive efforts to reduce deposit costs and bringing new relationships drove our all in average cost of deposits down from 71 basis points from the second quarter of 2020.
To 23 basis points achieved in the second quarter of 2021.
Our securities portfolio increased by $82 million to end the quarter at $135 billion.
During the second quarter, we primarily add on municipal on agency securities with a weighted average rate of 231%.
For the fifth consecutive quarter tighter credit spreads reduced the unrealized loss on our CLO portfolio, which was down to $3 million at quarter end.
The improvement in CLO pricing this quarter added a penny to our tangible book value per share relative to the prior quarter.
The CLO portfolio declined by $100 million during the second quarter as we are seeing an increase in payoffs, resulting from refinancing.
The higher level of payoffs is accelerating our diversification out of the CLO portfolio, which is part of our longer term balance sheet management strategy.
Our entire securities portfolio ended the quarter with a net unrealized gain of $20.9 million and the total change in unrealized net gains during the quarter at of 19 to our tangible book value per share.
Our credit quality remains strong in the second quarter, and we saw positive trends in asset quality.
Nonperforming loans decreased $4.6 million to $51.3 million from the second quarter about 62% of this balance or $32 million represented loans that are in current payment status, but our classified nonperforming for other reasons.
Delinquent loans decreased $26.3 million in the second quarter to $35 million or 5.8.
Percentage of total loans, driven largely by <unk> loans paying off and migrating back to accrual status as we work through the forbearance and deferral of process with our consumer borrowers.
Our loan deferral numbers declined by $22 million to 1% of total loans held for investment down from 2% at the end of the first quarter.
Let me turn of our provision for the quarter.
Although we had some provision requirement related to growth from the loan portfolio. This was offset by the improvement in asset quality and the improving economic forecast utilized in our model.
As a result, we recorded a modest negative provision for credit losses of $2.2 million in the second quarter.
Net of this provision release, our allowance for credit losses for the second quarter totaled $79.7 million, which reduced our allowance to total loans coverage ratio to 133%.
Excluding our PPP loans in warehouse loans, both of which have lower relative risk levels in our reserve methodology. The ACL coverage ratio stood at 1.7% of June 30th.
But the decrease in our non performing loans, our ACL coverage to NPL ratio remained healthy at 155%.
Our capital position remains strong with a common equity tier 1 ratio of 11, 1.4% and has benefited from the strategic actions completed over the past several quarters.
We continue to be prudent and strategic with the use of our capital to maximize benefits to shareholders and to build franchise value.
This time I will turn the presentation back over to Sharon.
Thank you Lynn.
I'll wrap up with a few comments about our outlook.
We believe we are well positioned to deliver a strong second half of the year with a number of catalysts in place that we expect to positively impact our growth and profitability.
From a macro perspective.
Economic activity continues to build momentum as operating restrictions on businesses in California on a rollback in most counties.
Barring any setbacks, resulting from the spread of new COVID-19 variance.
Appears that our markets are positioned to experience economic expansion for the foreseeable future.
So the operating environment should be favorable and we are well positioned to capitalize on the increasing loan demand that should result.
With our banking team is doing an excellent job of developing high quality lending opportunities.
On the contributions we are getting from new bankers, we have added over the past several months.
Our loan pipeline continues to grow.
At the highest level, it's been since I joined the bank in March of 2019.
Based on the pipeline.
The continued opportunities we have to offset runoff with strategic purchases of high quality loans.
We continue to expect our full year organic loan growth, excluding PPP to be in the mid to upper single digits.
We should also continue to see further reductions on our deposit costs of some of our larger money market and time deposits mature and re price.
As Lynn mentioned we.
We of $510 million of deposits at a weighted average rate of 163% scheduled to mature in the second half of the year.
The continued reduction of deposit costs should help us protect and to potentially expand our net interest margin in the coming quarters.
We sold the redemption of our series G preferred stock on our sites and as previously mentioned expect that to be of late 2021 early 2022 events subject to regulatory approval.
And finally, we have the impact of the Pacific Mercantile Bancorp acquisition.
With all the cost savings projected to be realized by the end of 2021, we should quickly see the positive impact of this transaction on our level of profitability.
And while we haven't modeled revenue synergies into our projections. We believe there will be positive impact as we expand relationships with top of our clients and provide our new colleagues with the ability to accelerate their business development efforts.
Pacific Mercantile will also provide us with deeper presence in Los Angeles market and our first exposure to be aluminum bar, which we believe will be a good source of growth for the company in the coming years.
In addition to the over 1 billion of loans that we will add with this transaction.
We will also add significant amount of unfunded loan commitments that represent another potential tailwind for future loan growth and in particular expected growth and line utilization as the economy picks up.
For the remainder of the year, our top priority will be completing the Pacific mercantile acquisition.
Executing well on the integration and realizing the projected synergies and continuing to enhance our organic growth engine.
I want to thank all of our dedicated and talented colleagues across banc of California.
For the great work to deliver such a terrific quarter.
Thank you for listening today.
Forward to sharing more about banc of California progress in the coming quarters with that operator, Let's go ahead now and open up the line for questions. Thank you well now begin the question and answer session. If you'd like to ask a question. Please press Star then 1 on you touched on phone using.
Using a speakerphone please pick up your handset before pressing of Q2.
To withdraw your question. Please press star 1 to.
Today's first question comes from Kim of resort with Wells Fargo. Please go ahead.
Hi, good morning, everyone.
Morning.
Morning, maybe starting with Pac Mark it's good to see the cost saves projections being increased I guess part 1 of the question is where are those increased cost saves coming from and then part 2 in your commentary for reinvesting some of those cost saves into on.
New hires how will that materialize on the results on I guess, what portion of the cost save should we actually expect to drop to the bottom line.
Okay.
Let me, let Linda address that first.
That's fair.
Good morning Timur.
So being at the increase of me estimated cost saves.
Stems mostly from.
Looking at I think the facilities costs and.
<unk> costs staff costs as well.
We've gone through the integration and conversion process. So.
It just takes a little bit of time to sharpen our pencil on all of that so that's probably the majority of them are.
I think from where we sit now we would expect the majority of those to drop to the bottom line.
As we with the visibility we have now.
Okay, Great and then maybe looking at the loan purchases. This quarter can you quantify the dollar amount purchased the mix between us so far on multifamily and then as you look at the remix in the us of Fr book from a yield standpoint.
Just talk through where current purchases are coming on from a yield standpoint versus where the existing FSFR loans are rolling off.
Sure.
On starts.
So for the purchase of this quarter.
It's approximately about $200 million.
And the total loan funding and net.
The majority of our single family.
There is a small portion that was multifamily that continues to be.
Challenging of asset class to get a hold of.
So I would put the split it about $170 million at Sapphire to $30 million multifamily.
And with respect to.
The yields that we're seeing coming in on me, so far but I don't have the.
That.
That is included.
Again, our overall Yale of I'll have to come back to you on the yield that we're seeing come through.
It's probably on the low threes.
Okay.
Tim on just a follow up on that I mean.
The weighted average loan yield that we are that we're buying these are non QM mortgages.
They are very attractive there in our market we have a.
I'd say unique sourcing that we have a tremendous team on the warehouse side and we have some good relationships that allow us to.
Looking to loans that were already secured by and look at high quality loans. Since they are the 2 of those makes sense to bring on in the black on on the loans that we're buying.
It was well above 4.5% in general.
And then to get to the trade yield.
We expect there's a whole bunch of things that are implied there including me.
Prepayment speeds and so we're obviously buying them at a slight premium.
But lower than what we would take in the market generally because we're using our relationships and if our if our prepayment speeds are off and the yield is going to be is going to be.
Higher or lower.
And what we're projecting but we I think our team is pretty good at this and I'd say on in general It probably is getting asked me any upper threes.
It's probably lower than our CFR portfolio overall, but it's higher than our margins and so.
In general on supporting our margin.
It's just a good good source for us to help.
Maintain our earning assets at the right level the amount of production that we put on in the quarter was I was really really pleased with what our team did to have 9.
<unk> $900 million plus of production in the quarter and have fundings in the mid.
800 is pretty substantial for a company of our sizing for.
For balance sheet was 6 billion of loans.
And it was really balanced I mean, we actually put on high levels of production and in all categories and then what nets out. It's just a function of where the prepayments on which is very hard to control.
Okay. Thanks for clarifying the assets are trading.
No problem.
Maybe just 1 more if I kind of on the on the warehouse balance of <unk>.
Certainly a different trajectory from where we've seen some of the other peers of Yours report second quarter results I guess in <unk> and <unk> and the ERP growth.
Is that from increased relationships is up from increased utilizations or is that from really a dip in first quarter balances right at the end of the quarter on an average balances that are really move as much as of end of period would suggest.
Hum.
So good question I mean, I would say, it's actually a combination of all of those things believe it or not so we did have a dip average balances in the second quarter with higher end of period balances excuse me in the first quarter average balances were higher end of period balances were lower so we were bringing it back up on the and.
In the second quarter.
We have brought on some new relationships just to prove on the other day that are we tend to bank the midsize mortgage bankers not not the super large folks. Although we have a few of those are our team is really exceptional at kind of managing.
Within our comfort level.
We've always said this is not going to be an outsized portion of our company, it's going to be.
A.
Healthy part, but not an outsized part something it's a lever that we can pull we feel comfortable with the size right now and I don't expect it to grow to grow very much on our team has done a great job of managing it as we grow as a company.
It can be maintained at the same percentage, but we don't see it growing much from here.
Okay. Thank you for the questions of nice quarter.
Thank you I appreciate it.
Next question today comes from Matthew Clark of Piper Sandler. Please go ahead.
Hi, Matthew was around perhaps muted sir.
Alright, it looks like we will go to our next question comes from Gary Tenner of D. A Davidson. Please go ahead.
Thanks, Good morning.
Good morning, Gary.
Hey, so youll talked about the purchases in single family multifamily.
And obviously gotten warehouse drove the quarter sequentially from a low growth perspective could you talk a little bit about kind of a construction on the core C&I.
This obviously remains a bit of a challenge on construction in Shanghai I think you had a couple of quarters of growth until this quarter. So maybe just talk about kind of what the what the trends were in the core C&I growth here.
It's hard.
From my perspective.
It's kind of all blended and so while it's easy to say.
Our house was 200 million net and that's the growth.
<unk>.
It's all it's all buckets together in terms of.
On the quarter and the production and we can't control much of what pays off and if something is paying off faster in 1 quarter and we happened to of a lever to pull we're going to use it.
I I would focus on the production side and the $900 million of production and $800 million plus of fundings, which.
It is very substantial in our fund and our pipelines are still strong C&I you know in the quarter. We had a lot of production, we've just had pay offs and.
It just happens, but very pleased with.
With what we're what we're doing here.
I don't see any any real headwinds on C&I on more than I see than anything else I mean, I think our pipelines are very strong.
Prioritizing strong borrowers pack Merck, obviously has a good C&I engine and we're going to be adding other capabilities.
These along with our ABL function, which is they do more of it than we do and they've got a really good team that we're happy to bring on board.
We continue to see C&I is something that we're going to we're going to grow and focus on.
It's everything from service businesses in health care.
We havent vertical on entertainment as you know doing streaming production.
And then owner occupied real estate, which as you know tends to be the low cost leader in that area, but we have the ability to do it as well.
And Jared I would just add you know in looking at production numbers from first quarter did include SBA production for round 2 of them of.
The P. P. P. So kind of always sit back and look of the numbers I agree with your comment it's all the way across the board and its hard to just say it.
Purchases in warehouse when I exclude Pete.
P. P. P I would actually say our production for all of the other core lines of that 60% quarter over quarter. So I think that contributed to it as.
As well.
When you kind of pull those numbers of apart.
That's helpful.
Thanks Lynn.
Okay.
Just some kind of bookkeeping on PPP could you give us the average PDP balances for the quarter and the PTC revenue.
Revenues in the quarter.
Yeah.
The average Joe might take me on moments.
But when we look at the revenue from.
The quarter.
Approximately.
The same between first quarter end of second quarter on let me pick on that page here.
Yeah.
Yes.
Yeah.
So in the first quarter I think they've emphases that we brought through of about $1.9 million and on the second quarter of about 1.8 million so not much difference between.
The 2 periods.
Then from an average balance perspective, I'll pull those numbers have to get back to you.
Okay. Thank you.
Thanks, Gary.
Hello, Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then 1 today's next question comes from Tim Coffey of Janney. Please go ahead.
Thank you good morning, everybody.
Hey.
Well I was just curious what the of prepayment of dollars were in the quarter and interest income.
Okay.
Yeah.
Right.
So the.
I think last quarter, we are we've pulled those numbers of part I think this quarter.
And we indicated that.
That our loan yield included 18 basis points of them sort of that prepayment accelerated accretion in the non accrual interest, whereas last quarter, we only had about 13 basis points.
So when I put all of that together its about $2.6 million on the.
The majority is prepayments relative to last quarter.
So last quarter I think the number is $1.9 million this quarter about $2.6 million.
For those 3 numbers that way.
We look at in order to get to our core loan yield I would just add that on.
Our core loan yield when we pull those particular features out has held up well considering the continuing low interest rate environment and.
I get to that that we're looking at that we're supporting our on net interest margin.
Okay. That's helpful. Thank you.
And Jared just kind of philosophically about the loan to deposit ratio. If you do run off of that for you.
You will run off of $500 million in those high cost deposits from sure.
That would normally put on upward bias on your loan to deposit ratio do you feel comfortable running at higher than where it is right now.
We can run at 95% to 100% I don't want to run it too much past that.
And I'm comfortable with the amount of volume that we're able to bring on on the deposit side relative to.
On the deposits that we have running off when we look at our at our Cds, we're retaining approximately 46% of the Cds that were that are maturing when we give them just a posted rate.
It's remarkable how much liquidity is out there and is willing to take <unk>.
Duration, and we've actually been increasing our rates on duration Cds.
Extended maturity Cds for that reason is as we monitor it and see what the retention rate as we keep saying well maybe now is a good time to take 3 year money at a really low rate.
And our deposit costs are still going way way down so I, Tim I am comfortable that we can absorb the maturity of.
The stuff that's running off at the end of the year without it really ballooning our loan to deposit ratio and we also have pack mark coming into the mix here they've got some really strong.
Kind of a very strong deposit base, a strong base of non interest bearing deposits from core operating companies that we hope to expand and so between those 2 things our own engine and there is I think we'll be fine.
Okay Alright.
And then I would just.
I would just add 1 other.
What other.
The point I think related to these particular deposits I think theres.
In addition to the retention on Tvs, I actually think theres, an opportunity to simply reprice them into the current market and you know we're looking at that so with them being priced at a 163 basis points.
The current rate environment, and they could reprice and be retained.
So theyre not necessarily all expected to run off.
And then I completely agree with the comments on loan to deposit ratio.
Yeah on on that point, so we were sort of.
So of kind of our non of.
Or just kind of of what I would say a run of the mill Cds with clients.
On that were not especially contracted we're seeing of 46% retention rate on.
Hi.
Just kind of taking our posted rates we have some large balances of what we would call specialty deposits that are that are better better time deposits that were contractually agreed on at specific rates for specific maturity and those of the ones that Lynn is talking about that we think that.
We will either find new replacement for them or those deposits will might actually reprice at current rates and we will be able to retain them. So just because they are they're expensive doesn't mean, they're all going away.
It could reprice.
Current rates.
No. That's a good point of good point of view, so thanks for adding that.
And then the.
The redeeming the remaining preferred stock what are some of the hurdles to doing that.
I don't think we see.
No.
The hurdles from a free.
From a capital standpoint, we do need to go through the regulatory approval process like we did last time and have to respect that process, but.
We didn't see a lot of.
There wasn't any lack of visibility with the regulators were clear with us on what we need to demonstrate.
When we demonstrated that to them, we got we got approval.
And we expect the same process at this time when do you see any challenges on.
On the series D that we need to talk about.
I wouldn't characterize them as challenges I think we have to recognize we're coming through of pandemic.
We have the opportunity to redeem series D. This year, which benefited our earnings for this year.
And we are very focused on our P. M B acquisition and the success of that and getting that integrated. So I think it's just a matter of the process and demonstrating all of these milestones along the way.
Okay.
We feel good about our R. R.
That's why our timing as you know of fourth quarter or first quarter, it's hard to know exactly but but.
I think that's a fair kind of guide right now.
Yep Yep.
This is consistent with what you've been saying on the call too about what the worth of near term focus is.
Okay, great. Thank you both of my questions I appreciate it Tim. Thank you. Thank you and our next question today comes from Matthew Clark of Piper Sandler. Please go ahead.
Hey, good morning.
Welcome back Matthew right.
Sorry of jacking to that's alright neuro.
On.
On the the warehouse and you may have touched on this in your prepared remarks, but the balances being up kind of going against the grain with what we've seen elsewhere.
Much of that is increased utilization how much of that is new relationships and what are your thoughts on kind of the sustainability of balances.
So a.
A little bit is a little bit as new clients and some of it is increased utilization. So it's a mixture of both.
Last quarter, our average balances were higher than end of period balances and so this quarter. It was kind of getting back up to kind of where the average is got to last quarter and maybe a little past that.
We don't see it.
The percent of warehouse growing from this point, which means it could expand as we grow our company, but we don't see it expanding much from where we are right now.
We have several hundred million dollars of low cost deposits associated with our balances.
These are true relationships and our team is really strong at what they do.
And so they've been able to manage the flows up and down as we've requested them. It's really just 1 lever that we have to poll among many many levers and you know as we expand with Pac Merck and with the other initiatives, we have going on and it becomes a lower percentage of our overall balance sheet, but we're comfortable with where it is right now and on.
Team is doing a good job with that also because of who we bank, which are mid of mid sized mortgage bankers.
Our rates tend to be higher than some of our peers.
And the average <unk>.
Usages.
I would I would say moderate.
There is a lot of volume right now and we want to be there for our clients.
So we're helping them, but we recognize that.
They can flow out the way it flows in and that's why I'm. So pleased with our production engine. This quarter. I mean, we had just to do $900 million of production on a $6 billion of loan portfolio is pretty substantial and I think it speaks to the power of our of our growth engine and how well our teams are working together.
Great and then.
On a related question just on the the ACL of the reserve I think previously you talked about maybe stabilizing around 130, youre nearing that now ex PPP.
What are your thoughts about maybe dipping below that given the increased contribution from the warehouse.
Well, we look at it without warehouse too and I say as Lynn mentioned in I think in her prepared remarks, but if when you exclude that were like 175 or something like that.
I think.
We're going to continue to run our model, we feel comfortable with where it is now if we continue to have loan growth.
It probably stabilizes and.
There's not a lot of provision releases.
Going forward I'd prefer not to release some of it's just our credit quality is really strong right now and when you look at our peers were a little bit above them, but I think we feel comfortable with where it is.
What are you thinking.
Yeah, I would agree with your comments Jared I don't know if I'm.
We're quite ready to be saying that there is a lower a lower number inc.
Being aware of them.
I think the economic landscape are positive.
Credit quality trends kind of to your point.
Portfolio mix it does matter and we did have a higher.
Level of warehouse balances at the end of June compared to the end of end.
End of March.
So.
But I think we are comfortable with them with our current level and let's see how the economy unfolds.
Okay, Yeah. It sounds like it would come down below that just given the 170 ex ex warehouse, but that's okay.
And then just on the on the dividend your earnings power continues to strengthen.
Updated thoughts around increasing the dividend here.
Alright.
We are always looking at different ways to use our capital and Thats 1 of the things. We can look at obviously, we're reinvesting in our growth.
We're hiring people.
People have asked whether we wanted to of share buyback or increase the dividend and I think all of those things are on the table.
Okay. Thank you.
Thanks Matthew.
And ladies and gentlemen, our next question today comes from Jackie Bohlen of <unk>. Please go ahead.
Hi, good morning, good morning, Jackie.
I just wanted to touch base on slide 8 on.
And it's been reference to another question to you because I know you discussed the specialty deposits on how that's where some of those higher cost balances are going up.
Fluctuate later in the year, but I noticed that there was a nice uptick in those balances between <unk> and <unk> and so I was just wondering what the driver was of that.
So.
That bucket is our specialty and business banking unit.
It's kind of where we put on but there theyre growing noninterest bearing and low cost checking balances and so.
We had a we had a big uptick in our I think of a 6% in DDA growth, which allowed us to absorb runoff in Cds.
And money market.
If they're just going after operating accounts like like everybody else in our company and then I get that.
In terms of our business banking unit and.
Our real estate unit in our community banking on it and then in terms of specialty we do have some.
Often of hunting capabilities in on the fiduciary side property management bankruptcy trustee.
And other similar especially deposits and I don't want to get into of too much because it's a little bit of.
The other specialty niche that we have but we have an excellent team that works hard to.
To bring in those clients.
We are good at it because we are good on the backend in terms of the technology and support and we'll get on the front end and understanding the special needs that they have to serve them well and.
We're really.
Really blessed to have such a great team.
Okay, great. So it sounds like as.
I know you had a lot of great core growth in the quarter and a lot of it was centered in there and just shows that you know teams continuing to bring on new relationships to the bank that's of great way to think about it yes. It is broken out between it's a huge amount of it is new relationships to the bank.
We look pretty.
On a very granular level of where the growth is coming from is is it just money that's sitting in existing accounts and people are building up their own liquidity are we bringing new relationships in of new accounts and it's it's largely driven by new accounts.
Okay. Thank you that's helpful.
And then 1 just 1.
1 other 1 from me when I think about the the market on the competitive pressures that ive been reading about just on local news sources.
Curious, where you stand in terms of your current employee base relative to full employment to kind of wherever you'd like to be on that scale.
Yeah, well, just open positions and how how the pace of equipments and out of Boeing.
Well.
Really good question and California as announced this morning that.
L a county.
The unemployment rate went down unemployment is sitting at about 10, 4%.
We have not had a problem.
Tiring that people that we've been seeking.
It's.
It's a testament I think to.
Kind of the buzz that we have around our company.
And the publicity that we've gotten in our markets.
And we are of very talented recruiting team that is out beating the streets.
And bringing telling the story on bringing people over I think we have a pretty cohesive message too in terms of what we're doing so people are very clear when they come here.
What we're doing we're at about 600 employees now.
There's about 100 or so.
Coming over from Pac Merck.
So it will be at 700, there of some key positions in terms of.
Relationship people that we are looking to fill where we're just seeing continued growth.
So we are looking to hire.
An add on the relationship manager side.
To do that if you're going to bring in a lot more relationships you you need to have the right gearing ratio on make sure youre, bringing on the right support people. So that you don't overwhelm that people that are here.
Supporting more and more while youre, bringing on new relationships. So we look at that pretty carefully.
And try to balance that.
But I wouldn't say that there are any.
Any key executive positions or anything like that we need to bring on right now and I don't I feel that we're we're we're properly staffed.
That said.
Where we are hiring is specifically on the relationship side. When we can find high quality people that can bring over good relationships as we've done in a couple of markets.
Somebody up on the <unk>.
On a central Valley Who's just done a great job, bringing in new relationships and hired somebody in San Francisco as well.
Those are people that used to work for people that worked here. So these are people that we knew we knew the quality of what they would do if they were interested in working for us and we knew the type of thing that they would bring in and they are and they show immediate results and so we're going to continue doing that when we know that there are of high quality of people out there that are looking to join US we're going to continue to do that but I wouldn't say that we have.
<unk> you.
Where we need to add 10% or anything like that we're going to hit some really really great talent from Pac Merck and so we know that in kind of anytime we're looking to hire somebody. We asked the question is that body is that she can be filled with somebody from Pac Merck and should we hold off.
I hope that answer your question on tracking.
Yeah, Yeah, it does and it sounds like you have a good internal referral system in terms of employment.
Right.
It's really good I mean, we're hearing there there's things they say hey, maybe we should look for somebody here are bad and Theres always we canvass our team first and say how do we know before we just go to the streets in and try to find somebody that we don't know.
We tried to figure out is there something specific that we know yes.
Okay, great. Thanks, Darren Thank you.
Thank you Jackie.
Ladies and gentlemen. This concludes today's question and answer session and today's conference went from.
Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Okay.
Okay.